Decision Uncertainty Essay

902 words - 4 pages

Decision of Uncertainty
Darylisha Jones
QNT/561
February 14, 2011
Paul Thomasman
Decision of Uncertainty
Introduction
Decision: Extending automobile warranties or not?
It comes a time when one has to make that decision of extending an automobile warranty when it has expired. Because auto warranties provide well needed protection, it does not come cheap be any means. Therefore, the decision to be made is the price of purchasing a warranty over the cost of repairs without a warranty. An extended warranty supplies the ability of possessing coverage of an automobile. It supplies coverage for repairs, parts, rentals, and even labor at a warranty rate rather paying out- of ...view middle of the document...

Bayesian statistics provides extension of a classical approach by using sampling data as well as considering all of the other reachable information (Cooper & Schindler, 2006). Therefore, Bayes’ theorem would be appropriate for predicting the likelihood of car repairs within five years as well as the probability of the warranty ensuring such repairs. In the next five years of owning my Chevy Impala, I establish that there is a highly chance of needing repairs that will cost well over $2,000 dollars that not covered without a warranty. These repairs, which are not covered, are at 5% chance of having repairs carried out on the vehicle. Finally the next step is to set up the variables to study the probability of engine repairs.
Engine Repair (1) = ER1 = N/A coverage excess of $2,000
Engine Repair (2) = ER2 = Coverage with warranty
Probability of repairs not being covered by a warranty
(P (ER1) = .05)
Probability of repairs being covered by a warranty
(P (ER2) = .95

After researching within the next five years it is highly likely that my vehicle will need repairs with a 90% chance.
P (B|ER1) = .90
Chevrolet mechanics supports that they produce quality vehicles, which are capable of holding up over time however, there is a chance that within five years I may need some kind of repairs rather they are small or big. Therefore, the probability of my vehicle not needing any type of service at all is .15
P (B|ER2) = .15
Posterior probability according to Bayes’ provides:
P (ER1/B) = P (ER1) P (B|ER1)
P (ER1) P (B|ER1) + P (ER2) P (B|ER2)
= (.5)(.90) = .045
(.5) (.90) + (.95) (.15) .1875
= .24
According to this...

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